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- Industries You DON'T Want To Buy đ«
Industries You DON'T Want To Buy đ«
You read that right, here are the industries that you might want to think twice about purchasing
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Welcome To Our Annual Special Edition âš
Typically, we dive deep into industries primed for investment. Today, we're flipping the script and exploring industries you might think are less attractive and would generally pass onâŠ
We want to make sure you're getting the most bang for your buck when you purchase a business, and we would never steer you in the wrong direction. So stick with us while we tell you which businesses you should maybe take a second look at rather than immediately passing.
INDUSTRY BREAKDOWN
Who is Warren Buffett?
For the Gen-Z readers, Warren Buffett is a legendary investor known for his savvy and strategic approach to buying undervalued companies which he has done since 1965! Heâs been so successful (annual returns of 19.8% for over 50 years!) he has become one of the richest people in the world with a net worth of $130B. He's been incredibly successful by identifying opportunities where others see none. One of his notable strategies is the "cigar butt" theory.
Buffett's "cigar butt" theory involves finding companies that have been beaten down by the market and are trading for less than their asset value. The idea is to pick up these companies, watch them recover, and eventually profit as they succeed. Itâs like finding a discarded cigar butt with one last good puff left in it - maybe not glamorous, but profitable!
DEAL REVIEW
Value Investments: Good Companies at Fair Prices
Buffett is known for seeking out value investments, where the asking price of the business is less than its asset value. For small businesses, this could translate to acquiring a solid company for its Furniture, Fixtures, and Equipment value. While this approach is typically practiced in the public Stock Market, we see a similar opportunity to apply it to Mainstreet - focusing on companies with good local brands, but in need of some TLC. This focus on a businessâs intrinsic value ensuring a âgood dealâ on paper translates to a sound investment in reality.
DEAL REVIEW
Deal Structuring: Lessons from Bank of America
During the 2008 recession, Buffett's deal structuring prowess was evident when he invested in Bank of America. Saving you the finance speak -he negotiated terms that included preferred stock with a hefty dividend and warrants to buy common stock at a favourable price in the future (when performance improved). For a small business, a Buffett-like structure might involve negotiating a deal that involves a lot of seller financing (you pay the seller a portion of the price using future profits of the company) and earn-outs (the price you pay for the company depends on the companies future performance). Why does Warren love this deal structure? Because they can be a win-win for both parties! Unlike Private Equity firms, (which have been compared to âvampire squidsâ), business owners choose to sell to Warren, often selecting his offer - even at a lower price!
Why would they do this? Well, Warren makes a few things clear:
He will stay true to his word and pay the price he outlined in his offer
He will close the deal fast
He will keep all the employees hired and happy
He will allow the company manager or CEO alone
Even though the Bank of America deal was for a whopping $5 billion dollars - you can apply these same principles when buying Mainstreet deals. And hey, who knows, maybe youâll even become a billionaire from it! đ
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INDUSTRY BREAKDOWN
Buffett-Friendly Deals: Which Would He Be Interested In?
Let's explore a few Mainstreet business industries typically seen as "unattractive" by buyers and see how they can become gems through the cigar butt approach.
1. Local Restaurants đ
Why Unattractive? High competition and often razor-thin profit margins.
Why Invest? Have you ever heard of a local restaurant that you loved shutting down even though it always seemed busy and it was next to impossible to get a reservation? Mismanaged restaurants like this are perfect for the âcigar puffâ strategy. These restaurants often have a strong brand in the local community and their downfall is usually due to their own success (overstaffing to keep wait times short, poor inventory management, buying retail produce, etc.). Often, itâs not the first (or even second) owner of a restaurant that makes moneyâit might be the third.
Context: When restaurants fail, they often become a vacuum of the current ownerâs time and money. So why buy? This pressure to sell allows buyers to scoop up these restaurants for either the equipment value or sometimes simply the relief of taking over the lease (providing seller financing for the rest of the purchase). With better management, you can turn the restaurant profitable with minimal capital down. Side note: since Warren owns Kraft-Heinz, heâll be happy to take your money when you order ketchup for your new restaurant.
2. Childcare and Early Education Centres đš
Why Unattractive? High regulatory requirements and liability concerns.
Why Invest? Centres with a strong reputation for quality care and education are essential for working families. This space is not dominated by large Fortune 500 companiesâlocalized brands are often perceived as more personal and approachable. Developing a local brand with a safe, nurturing environment and high educational standards can attract high-value clients who want the best for their kids. There is a natural competitive moat from new entrants, as you canât just slap a sign on your building and call it a daycare. And when it comes to kids, parents are extremely price-inelasticâthey will continue to pay even if you raise prices!
Context: While demand for daycares and child education is high, the asking price multiples can make Warren squirm. To overcome this, many daycare operators didnât get into the business purely for profit. You can beat out the highest bidder by being a good person who doesnât want to damage the sellerâs reputation. An acquisition strategy may involve buying a minority or 60-80% stake in the business, allowing the owner to take some chips off the table while rewarding them for improving operations over the next 2-3 years before buying them out 100% (an earn-out). Like the Bank of America deal, structuring a deal with asymmetric upside (low price today, high value in the future) is the way to compete in this hot category.
3. Laundromats đ§ș
Why Unattractive? Perception of being low-tech and low-margin businesses.
Why Invest? Laundromats with modern amenities, additional services (like dry cleaning or wash-and-fold), and a clean, welcoming environment can draw a steady stream of customers. Further, because these businesses are cash-based, many banks wonât finance them completely, creating opportunities to explore creative deal structures with sellers.
Context: While not a glamorous investment, laundromats provide a necessary service with consistent demand. Upgrading equipment for energy efficiency and offering digital payment options can enhance profitability and customer satisfaction. There are a lot of SMB buyer gurus on social media talking about buying laundromats for zero cash down, ultimately driving up demand. However, with roughly 35,000 laundromats in the USA, there are plenty of independent diamonds in the rough to find.
Check out these Buffett-Approved businesses for sale:
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TWEET HIGHLIGHT
In 1956 Warren Buffett retired at the age of 26 with a net worth of $175k (~$1.7m today).
Why did Buffet retire so early and how did he return to become the greatest investor of all time?
Time for a storyđ
â Acquired Podcast (@AcquiredFM)
2:30 PM âą May 21, 2021
If you are above the age of 35, or were a business major in University, then you know all about the man weâve been obsessing over in this issue.
If you are neither of those things, then here is a very interesting thread telling you all about Mr. Warren Buffettâs success. Although a long thread, there are some interesting gems in here that you might surprise you! đ
GOOD READS
Below is a list of articles, books, and other resource we recommend for buyers or operators of small businesses!
Now, we donât want to beat this âWarren Buffettâ theme into the ground⊠but in case you want to explore more about the Cigar Butt theory and have it explained by someone who does more than write a cool newsletter (đ), here is an in-depth article.
This issue has been talking about what industries you typically should not buy a business in. But what about the industries that will never go away?đ
What businesses are sweeping the nation? (That pun is really funny if you read the articleâŠ)
THANK YOU
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See you next time!